U.S. bank stocks fall as investor hope wanes for policy boosts

Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., March 21, 2017.Lucas Jackson

(Reuters) - Shares in U.S. banks tumbled on Tuesday as investors shrunk back from a post-election rally on worries that President Donald Trump would not be able to live up to his promises for large-scale relief on tax and regulation.

Bank of America Corp shares fell 5.8 percent making it the biggest driver for a 3.9 percent sell-off in the S&P's bank subsector and compared with a 5.5 percent drop in the KBW regional bank index and a 1.2 percent drop in the benchmark S&P 500.

JPMorgan Chase & Co was the second-biggest drag on the banking index on Tuesday with a roughly 3 percent drop while KeyCorp was the biggest percentage decliner, down 6.5 percent.

Investors were worried that if the Trump administration cannot pass a healthcare bill that is up for vote this week, it will be harder to deliver on the promises for tax and regulatory reform, which helped propel bank stocks to their highest levels since November 2007, before the financial crisis.

“Financials are a very crowded long trade with Bank of America probably being the most crowded," said RJ Grant, head of trading at Keefe, Bruyette & Woods in New York. "The market is starting to get a little fed up with the lack of progress in healthcare because everything else is being put on the backburner."

The S&P bank index had its biggest one-day percentage decline since June 27. The index also broke below its key 50-day moving average, likely intensifying selling by technical investors, according to Grant.

Among the S&P 500 banks, Bank of America has been the biggest beneficiary of the so-called Trump rally with a 43.7 percent gain between Nov. 8 and March 20, well above the bank sector's 28.6 percent jump, the KBW regional index's 24.4 percent rise and the S&P 500's 10.9 percent rise in the same timeframe.

While the regional index has not risen as much as its bigger rivals, investors were pulling out faster on Tuesday as a cut back in regulation would have a bigger impact on these banks as compliance costs make up a bigger percentage of their costs.

"People are starting to look at who would suffer the most if regulatory change doesn't go through," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.

While Trump's regulatory reform and tax cuts would help many industries, investors had particularly high hopes for banks which have been weighed down by onerous regulations aimed at preventing a replay of the recent financial crisis.

Banks have also been hurt by trading in U.S. Treasuries around the U.S. Federal Reserve's rate hike announcement last week. Bank investors watch the difference between yields in short-term bonds and long-dated bonds as a narrowing of this gap shrinks bank profits. U.S. Treasury yields fell to three-week lows on Tuesday.

"Since the Fed meeting we've generally seen the 10-year pull back. We've seen the yield curve flatten. Some of the underlying mechanics that have helped financials have slowly started to slow the cracks," said KBW's Grant.

Reporting by Sinead Carew; Additional reporting by Lewis Krauskopf, Chuck Mikolajczak, Rodrigo Campos in New York and Diptendu Lahiri in Bengaluru; Editing by Lisa Shumaker